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bankers !!
benefits !!
cost !!
diamond !!
economics !!
marginal !!
politics !!
price !!
robert reich !!
teachers !!
utility !!
value !!
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We all have our favorite teachers – the ones who showed us compassion, given us advice, and taught us valuable lessons both in and out of the classroom. As such, teaching is often referred to as a noble calling. One of my favorite examples of the sentimentalizing of the teaching profession is this comic version of Taylor Mali's half-rant-half-poem, “What Teachers Make.”
However, despite the rhetoric, teaching is also an under-appreciated profession. To explain, when it comes to remuneration, with the exception of the small handful of superstar teachers who become millionaires, most teachers are underpaid (supposedly).
Enter Robert Reich. For those of you who are not familiar with him,he isa former Labor Secretary who served under President Bill Clinton from 1993 to 1997. He is also a former(?) professor at Harvard's Kennedy School of Government. He has also starred in his own documentary, Inequality for All.
Recently, he posted on his Facebook page a supposed conversation that he had with “a wealthy businessman” who believed that American teachers were paid too much. During this discussion that he had with this businessman, Reich bravely defended the embattled American teachers. He said that a nation's human capital is more important than its financial capital; and that, therefore, “if we want talented men and women to become teachers rather than bankers, we need to pay them far more.”
This Facebook post was a reinforcement of a similar post that he published last year in his blog when he championed teachers' “worth.” Not too surprisingly, the arguments he used sounded suspiciously a lot like Karl Marx's discreditedand debunked labor theory of value, which is an economic theory that argues that the economic value of a good or service is determined by the total amount of labor required to produce it.
Can you imagine if this were actually practiced? Can you imagine how much it would cost to pay for a single pencil? Considering how thoroughly the labor theory of value had been discredited and how long it has been since it had been discredited, Reich is either pretending to be unaware of this fact for a political reason, or he is truly clueless.
Can you imagine if this were actually practiced? Can you imagine how much it would cost to pay for a single pencil? Considering how thoroughly the labor theory of value had been discredited and how long it has been since it had been discredited, Reich is either pretending to be unaware of this fact for a political reason, or he is truly clueless.
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Furthermore, Reich does not seem to have any idea how prices for commodities – yes, labor is an economic commodity just as anything else – are determined, which is one of the first basic principles that is taught in any semi-respectable Economics 101 class. And I think it is very bizarre that he doesn't seem to know how different laborers' wages are determined considering the fact he used to be the Secretary of Labor! If a former Secretary of Defense did not know where Iraq was located on the map, you'd be a little concerned, too, wouldn't you?
One of the core tenets of economics that Adam Smith introduced to the world is the paradox of value, which is also known as the diamond-water paradox. The question goes like this: Considering the fact that water is vital for life whereas diamonds are not, why are diamonds more expensive than water?
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| Maybe she's to blame? Image Source |
The premise behind the question is certainly true. Water is vital for the preservation of all life as we know it. The popularity of diamonds, on the other hand, is the result of a marketing campaign gone wild. So why the huge difference in price?
That is because when individuals make decisions, they consider the additional cost and the additional benefit that would result from making the decision. This additional cost and additional benefit that people have to consider is known as Marginal Costs and Marginal Benefits respectively.
The important thing to keep in mind is that whenever a person decides to buy anything, he always has to consider the specificprice that he is paying for a specificgood that he is buying at that time. And then he has to consider how much additional benefit that he will get from enjoying that additional good, which always comes at an additional cost.
However, things change drastically if people were not buying a specific good at a specific price, but rather buying ALL of a particular good at the same time.
For example, if people all over the world simultaneously decided to buy ALL the drinkable water in the world, then yes, due to scarcity of drinkable water, the price of water would skyrocket. The price of diamonds would seem like child's play at that point. In fact, if that were to actually happen, unless your first name was Bill and your last name was Gates, you would never be able to go anywhere near a cup of water. That is, unless you had an army of very angry machete-wielding psychopaths behind you.
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| That might be enough to get into the Coco Bongo, but for a glass of water? Please. Image Source |
Fortunately, however, people never behave this way (here's to hoping that a nuclear apocalypse doesn't break out any time soon). In reality, individuals purchase a specific amount of water or a specific amount of diamonds at any given time. Therefore, what comes into play is subjective value, a concept that Reich cannot seem to get his head around. What subjective value states is that the value of any good is determined by the importance an individual places on that good, which is obviously different for every person.
Now, because we do not have to worry that the next bottle of water that we purchase will cost us tens of millions of dollars, unless we are literally fighting for survival in the remains of a nuclear wasteland, the truth of the matter is that most people value diamonds more than they value a bottle of water. If you want proof of this, try giving your girlfriend a bottle of Evianinstead of a diamond ring when you propose to her. And then tell me how saying “But honey, water is vital for life whereas diamonds are not” goes for you.
So now we know why diamonds are more expensive than water. Thus, using that example, we can apply it to Reich's argument that bankers ought to be paid less and teachers ought to be paid more. After all, as Taylor Mali said, teachers make a difference. So why do teachers earn so little compared to bankers?
Like the water-diamond paradox, when we think about why teachers are paid less than bankers, we have to think about marginal costs, marginal benefits, productivity, and subjective value.
If people had to collectively choose between employing ALL teachers and ALL bankers, most people would (hopefully) think that employing teachers would be more beneficial for society. Thankfully, however, no one ever has to make such a choice in reality. After all, if such a choice was made and teachers were paid as much as hedge fund managers, or more, then practically no one would be able to afford to go to school.
Or if the choice came down to teachers versus farmers, then practically no one would be able to afford to eat.
Or if the choice came down to teachers versus farmers, then practically no one would be able to afford to eat.
And after we take into consideration marginal costs, marginal benefits, productivity, and subjective value, whether we like to admit it or not, for reasons that range from marginal value that both professions provide for society to simple supply and demand, society in general values the services provided by bankers more than it values the services provided by teachers. Just like it values diamonds more than it values water. That is why there is such a big difference between what teachers and bankers earn.
Going back to Reich's Facebook post, it is therefore easy to see that by insisting that teachers are paid too little and asserting that a nation's human capital is more valuable than its financial capital (never mind the different marginal values that each profession brings to different people), Reich is attempting to force an objective viewpoint – his objective viewpoint – onto others. Seeing how people value things differently at different times and under different sets of circumstances, Reich is not actually making an economic argument, but rather a political one; and an irrational one to boot.
And I do believe that there is a word for that sort of behavior – demagoguery.
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